Mistras Group reported 22Q3 EPS of $0.14, above 21Q3’s $0.11 and my estimate of $0.23. Revenues of $178.5 million were 2.2% above the year earlier period but also below my expectations. My projections were in line with the company’s implied guidance.
Gross profit rose 3.0% with gross margin up 20 bp to 30.1%. SG&A expense grew 6% and by 80 bp as a percent of revenue to 23.3%. Income from operations declined by 1.3% to $9.1 million, but net income increased 29.4% to $4.4 million, due to a drop in the effective tax rate.
Unfavorable foreign currency effects reduced Mistras’s revenues and profits in the quarter. Cost inflation is also pressuring margins, especially in Europe, but the company is implementing price increases across its customer base to offset the higher costs. Without further improvement in profitability, however, Mistras may initiate a larger restructuring program, perhaps in 2023, to better align SG&A expenses with revenues.
Management reduced its full year 2022 revenue and earnings guidance. It now expects 2022 revenue of $683-$693 million, adjusted EBITDA of $53-$58 million and free cash flow of $15-$18 million.
My revised projections now anticipate full year revenue of $690.5 million, adjusted EBITDA of $55.7 million and free cash flow of $15 million. This produces estimated 2022 diluted EPS of $0.14. My projections imply 22Q4 revenues of $171.4 million, adjusted EBITDA of $13.4 million, free cash flow of $15.0 million and EPS of $0.02. That compares with 21Q4 revenues of $171.2 million and EPS of $0.00. Since Sept. 30, the Euro has advanced 5% vs. the U.S. dollar, which should ease some of the pressure on 22Q4 revenues and profits.
For 2023, I now forecast revenues of $710.9 million, up 3.0% and EPS of $0.24. The projections assume a 40 bp improvement in operating margin and a moderately lower tax rate. The stock has underperformed the market significantly since my last report, reflecting the company’s disappointing 22Q3 performance. With its sharp drop in price, Mistras’s stock looks more expensive on forward earnings. I am therefore reducing my price target to $5.00 (from $7.40) and my performance rating from “2” (Outperform) to “3” (Neutral). The revised performance rating suggests a more balanced view of upside potential and downside risk, in light of the disappointing performance and still high valuation.
This is a summary of my recent update report on Mistras Group, Inc. (MG). To obtain a copy of the full report, please reach out to me using the contact information provided below.
November 16, 2022
Stephen P. Percoco
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Linden, New Jersey 07036
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